Learning to Broaden Investment Horizons

For this coming academic year, I have been promoted to Assistant Professor from Adjunct Professor at the New Jersey City University (NJCU) School of Business. I'll be teaching a few capital markets and banking classes as well as an equity asset valuation class. I will also be working with the school's Student Investment Management (SIM) group. The SIM group has a solid history of meeting or beating its benchmark, which is none other than the S&P 500. So, how do they do it? Like any mutual fund or hedge fund, they have a team of portfolio managers and several analysts who specialize on a few industries. The portfolio managers are responsible for the choices, but there are some handcuffs when it comes to keeping in line with the industry weightings of the S&P 500. Due to the school's summer break and a few positions getting stopped out over the last few weeks, the SIM portfolio has a surplus of cash. Right now, roughly 31% of the portfolio is in cash. Normally, my view would be to hold off due to the market's run-up and to put the cash to work on a pullback, if not a fade, in the market. But that's normally, and, as we are seeing with several streams of data, the domestic economy is looking pretty good. As I shared with the students, they need to broaden their collective horizon. By that, I mean not always defaulting to the same companies that everyone is familiar or semi-familiar with. Years as an equity analyst have taught me that some of the best companies to buy are those that are key suppliers and count a number of key players as customers. Skyworks Solutions (SWKS) is a great example of this. While there is some concern about smartphone inventories, we are starting to see the mobile arena move beyond smartphones and tablets and that considerably broadens the company's addressable market. I am talking about The Connected Car, The Connected Home and the Internet of Things (IoT). Another strategy I discussed with the students is to complete the service circle. I've been bullish on Visa (V) and United Parcel Service (UPS) because they do this via payment and delivery, which are critical for the e-commerce that is driving companies such as Amazon (AMZN). Another is to keep an eye on key inputs and to consider which companies benefit when those costs are falling and which ones are poised for some pain when those costs are rising. Examples that we discussed included how falling corn prices could affect Sanderson Farms(SAFM), and what the recent drop in cotton prices may mean for HanesBrands (HBI) and denim companies such as Joez Jeans (JOEZ). We also talked about the implications of falling sugar prices as well as higher coffee prices. Stealing from investing great Peter Lynch, I also urged the students to keep their eyes and ears open because data points to be had were all around them. We also talked about some of the shortcoming in several government issued statistics and the large number of other data sources out there. Gallup, Nielsen (NLS), insight position papers from accounting firms and industry overviews from heavyweights such as General Electric (GE). Industry trade associations, such as the National Retail Federation, and industry trade publications such as Nation's Restaurant Newsare great sources of industry data and news. Two other pieces of advice I shared with the SIM group were to not fall in love with your stocks and to understand that even after doing all the work they may still have to pass on a company if the shares lack the right risk-to-reward tradeoff. One student asked me, Are you saying that we are looking for reasons to say 'no' to investment candidates? My response was that we are always looking to separate the best-positioned companies with the best risk-to-reward profiles from the pretenders. Only by looking at all the angles can you hope to minimize the drag those pretenders will have on your portfolio -- some will slip through and, of course, things will change. That's why investing is in many ways an iterative process. While I can pose questions to the SIM group, I cannot make heavy-handed recommendations. But if I could, I'd be recommending they own HanesBrands, Sanderson Farms, Visa, United Parcel Service and Amazon. I would also recommend they put companies such as Symantec (SYMC), Charles Schwab(SCHW) and Henry Schein (HSIC) on their watch list. As the academic year progress, I'll be updating you on the group's process and any interesting investment ideas they are mulling over.

Learning to Broaden Investment Horizons

I am encouraging a student investment group to look beyond familiar companies and data points.

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